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Brett King
Brett King

Brett King

Brett King - Moven

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Innovation in Financial Services

Innovation in Financial Services

A discussion of trends in innovation management within financial institutions, and the key processes, technology and cultural shifts driving innovation.

Think NFC is going to take years? You're wrong...

28 February 2011  |  7777 views  |  9

There’s a great deal of debate in the Financial Services community at the moment about the potential impact of NFC or Near-Field Communication technology within mobile phones and how it will effect the payments landscape. The financial services players are generally scratching their heads and although they admit that NFC phones like the iPhone 5, the Nexus S and others are interesting – they don’t see the need for rapid response. Most think it will take years to have an impact. After all, the lack of contactless POS (point-of-sale) infrastructure that supports NFC is in itself a reason why a sense of urgency is not necessary. There’s plenty of time to worry about that later. Right?

Wrong!

There’s an App for that…

In July of 2007 Apple launched the iPhone (what we call the iPhone 2G generally today). Since that time I’ve owned each successive generation of iPhone and I now also have an iPad. So what’s the big deal?

The most impressive thing about the iPhone is not necessarily multi-touch, retina display, ease of use, or core functionality, but is unquestionably the iTunes platform that brought us “Apps”. Prior to the launch of the iPhone, we’d never even heard of Apps, and yet today, just 4 years later, here are the stats on Apps:

  • 350,000 Apps for Apple and close to 200,000 for Android
  • 10Billion downloads for Apple, 2.5Billion for Android Marketplace
  • 15.1Bn in Apps Revenue expected for 2011
  • Daily downloads 22million per day - Apple
  • New app submissions/day - 587 (100 games/488 non-games)
  • No of Active publishers/developers - 72,000 on the US store
  • 160m iTunes account holders (that’s 160m credit cards on file)

So from it’s humble start iTunes was always more than just a place to come and download music or TV episodes, it became the core delivery platform for a whole new category of software and user experiences. At 10:26 AM GMT on Saturday, January 22, 2011, the 10 billionth app was downloaded from Apple App Store.

Now, before iTunes, the iPhone and “Apps” there had still been software – both for PC screens and for phones. Prior to the so-called ‘JesusPhone’, there were Java “Apps”, games and so-forth you could buy and download for your phone, but these certainly didn’t become ubiquitous, primarily because the usability wasn’t good enough and there wasn't a marketplace that distributed these Apps.

So here we are, just a few years later and there’s probably not a single person in the US, UK, Australia, Germany or France who doesn’t know what an “App” is. Worldwide mobile application store revenue is projected to triple to more than $15.1 billion this year and reach $58 billion in three years, according to Gartner Inc. That revenue was $0 in 2007.

And yet, there are bankers out there that still persist in the belief that mobile payments via your iPhone will take years to ‘take off’. In a debate on this via Twitter over the weekend one of the typical quotes was “I can see it, just not for some time…”

Why the App is a great paradigm for NFC

The dominant position from the card issuers and traditional too-big-to-fail banks is that there is already an existing point-of-sale infrastructure in place in the USA, for example, that will take years to replace with NFC or contactless capable terminals. This naturally limits the adoption of contactless payments technology because even though someone has a contactless credit card or a phone enabled with contactless technology, it still doesn’t mean that they can pay – if a merchant can’t accept their payment then it is essentially dead before it starts.

In our Twitter debate over the weekend Rich Clow (@richclow) from Citi came up with a strong analogy likening the existing POS infrastructure to the ‘rail network’ that opened up the frontier of the US in the 1800’s. Without the ‘rails’, without contactless point-of-sale terminals, how exactly will customers make payments using their NFC phones? What’s the good of having a locomotive unless you have rails you can put it on? It’s an excellent point.

Except … prior to 2007 there were no rails for Apps. The App didn’t effectively exist, but that didn’t stop Apple from creating the rails and the locomotive as part of the iPhone ecosystem at the time of their launch. Right now today Apple and Google are working on alternative payment schemes that will circumvent the traditional visa/mastercard POS systems and networks to enable both P2P payments and commercial transactions with merchants and retailers via phones. There may be some hook into the traditional payment networks behind the scenes, but all you’ll need to pay is an NFC phone and wireless network access.

How quickly will payments from one phone to another become ubiquitous? Answer: How long did it take Apps to become ubiquitous?

Put it this way – those out there that think this will take another 3 to 5 years to honestly compete with plastic mag stripe or chip and pin POS terminals, need to change their terms of reference. Apple and Google won’t wait for the rails. They’re going to jump straight to supersonic transport and the banks will still be waiting around for the train to stop at their station. Meanwhile, we’ll be choosing new payment networks as the paradigm for the next generation of commerce interactions.

Goodbye checks, goodbye plastic! If you’re a banker or card issuer, the sonic boom is coming your way…

 

Do we need POS infrastructure for NFC to succeed? TagsCardsPayments

Comments: (13)

Nick Collin
Nick Collin - Collin Consulting Ltd - London | 01 March, 2011, 10:04

Brett

I really don't understand what you're saying here:

"but all you'll need to pay is an NFC phone and wireless network access".

Are you suggesting that physical merchants won't need to install contactless POS terminals to accept NFC payments?  Is the idea that they would use NFC phones as terminals and then connect these terminals to existing payments systems via wireless networks?  Or do you have in mind something completely different?  How exactly would it work?

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A Finextra member
A Finextra member | 01 March, 2011, 12:42

Nick,

take a look at this link

https://squareup.com/

Gojmir

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Brett King
Brett King - Moven - New York | 01 March, 2011, 13:31

Nick,

The concept that you can only pay a merchant through a POS terminal is erroneous. There are a number of alternatives. Pay via network using a merchant code, NFC to NFC phone payments, pay via SMS, etc

I just don't believe lack of contactless POS is going to slow down adoption of this technology.

BK

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Nick Collin
Nick Collin - Collin Consulting Ltd - London | 01 March, 2011, 14:54

Hmm...   I'm not so sure.  Establishing a critical mass acceptance infrastructure, irrespective of the technology involved, is never easy in my experience. 

Actually, I think adapting the mobile phone to act as a terminal is a more promising proposition than using it instead of a card, but if you're going to do that, then you may as well get it to read payment cards rather than respond to contactless NFC devices.  Gojmir's Squared example reads mag stripe cards as I understand it, and there's plenty of examples of phones adapted to accept chip and PIN payments.

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Aaron McPherson
Aaron McPherson - Independent - Newton | 01 March, 2011, 15:42

I think there is some confusion here between NFC and mobile payments.  Arguing that mobile payments at the POS will happen in the next year is not the same as arguing that NFC will happen in the next year.  Apple and Google (and Square, and Starbucks, and PayPal, and many others too numerous to name) are indeed developing mobile payment systems, but these are not reliant on NFC at the point of sale.  Either they circumvent the POS system altogether or they use 2D barcodes displayed on the handset in combination with optical scanners.

The point that I and others have been making is that introduction of NFC chips on handsets does not mean that NFC will become the dominant mode of mobile payments in the next year, because the POS infrastructure is not there yet.  NFC may be used for short-range communications, like Bluetooth or Bump, or it may be used to enable "smart posters" that activate coupon downloads or other promotions.  It will not, by and large, be used for payments.

The comparison to Apple's creation of the App Store is misleading, because it did not require any hardware upgrades at all.  The entire thing is done in software using the 3G or Wi-Fi networks.  NFC is a completely different proposition, because the merchants have to purchase or upgrade existing terminals.  As anyone who's tried to use their contactless card recently will tell you, even terminals that are supposedly contactless-enabled often do not work properly, because they have not been maintained.  And even if they did work, there's only about 150,000 of them at most, by most estimates.  That is miniscule compared with the 4-5 million terminals in the US.

That's why NFC will not impact payments for several years; it does not, however, mean that banks don't need to worry about mobile.  There are plenty of other ways to use mobile devices in commerce, and banks will want to ensure that they have a piece of the action.  They will not be displaced, as you suggest, but they can certainly be marginalized.

It is certainly understandable that a mainstream media reporter would be confused by all the terminology, but that is all the more reason why those of us in the industry must be careful to be absolutely clear what we mean when we say "mobile payments".

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Brett King
Brett King - Moven - New York | 01 March, 2011, 16:12

Aaron,

I'm sorry you've completely missed the point here by honing in on NFC. NFC, P2P, Mobile Payments are all one and the same when it comes to their ability to change behaviours. What I'm saying is if you think you need a POS infrastructure change to change people's behaviour you're dead wrong.

The mobile as a payment device is the game changer. Not because of NFC, not because of P2P, not because it can be adapted to replace some POS systems, not because of the tech...it will work because it is simple and because it will be part of a new ecosystem created by the likes of Google and Apple.

Everyone is sitting here arguing about tech or standards - I say step back from the detail and look at the big picture. Behaviour change and modality.

I firmly believe that NFC is part of that, but NFC is not the game changer - the mobile device is because we've already changed our behaviour around the device, and payments is just the next iteration. You guys get too focused on the detail - step back and look at the behavioural shift that has already taken place with mobile.

BK

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Nick Collin
Nick Collin - Collin Consulting Ltd - London | 01 March, 2011, 17:07

To quote a phrase - "the devil is in the details"!

Sorry Brett, but I'm with Aaron on this one.

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Aaron McPherson
Aaron McPherson - Independent - Newton | 01 March, 2011, 18:01

Just to clarify, I was responding to your choice of title, "Think NFC is going to take years?  You're wrong...", which when I saw it, suggested to me that you were arguing against the position taken in the Sybase 365 study (http://www.finextra.com/news/fullstory.aspx?newsitemid=22299) that NFC contactless mobile payments were at least two years away.

Your opening paragraph certainly seems to suggest that you are referring to NFC as a mobile contactless payment application, but then you go on to talk about the iTunes app store, which has nothing to do with NFC.  Compounding the confusion is your response to the NFC skeptics:

"Right now today Apple and Google are working on alternative payment schemes that will circumvent the traditional visa/mastercard POS systems and networks to enable both P2P payments and commercial transactions with merchants and retailers via phones."

This sounds to me like you are saying the lack of contactless-enabled POS terminals doesn't matter because Apple and Google will "circumvent" them.  Fine, but then what is the role of the NFC chip?

 

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John Dring
John Dring - Intel Network Services - Swindon | 01 March, 2011, 23:09

All,

I, for one, am fed up with NFC being aligned with Mobile Payments.

But I do agree with Brett that the replacement of the POS with NFC enabled POS is not the issue.  Instead of millions of distributed merchant based POS terminals (which 'can' be tampered with), consider instead a central 'virtual and multi-channel' POS Hub.   Put the NFC on the mobile device, then use the mobile data network to connect it through the POS Hub to make a payment.  Figure a way to identify the merchant too, so that they get the payment. 

If the Hub is implemented by a mobile operator, they can offer true mobile payment to the phone account, in addition to being an Acquirer for a traditional payments network (with the NFC linking to a standard CC account).  Or the Hub could be a new business altogether.

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Brett King
Brett King - Moven - New York | 02 March, 2011, 22:17

Maybe the title should have been "Think Mobile Payments is going to take years? You're wrong"

:)


BK

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Matt Scott
Matt Scott - RenovITe Technologies Inc - London | 03 March, 2011, 14:19

For NFC/Mobile to achieve critical mass the following factors will be required:

* Mass roll out of NFC Enabled Mobile Devices
* Formation of a Global Governing Body to Agree Global Interoperable Standards (something akin to EMV) - this should cover the whole "token" lifecycle
* Willingness from the general public to try something new

At the moment Visa, MasterCard et al are all in the process of trying to go their own way - to varying degrees of "success".

The economics of issuing using a mobile-based framework rather than a physical card based framework are clear - although there are relatively high initial setup costs involved the investment would soon be recouped.

The main issue (from a consumer perspective) is that with everyone trying to implement their own NFC/Mobile Applications it leads to consumer confusion - a single "standard" virtual wallet concept (consistent look & feel, use) where Payment and Transit functions could sit tidily together. Something that is easy for the consumer to use and understand, that is transparent and fundamentally simple to use day in day out.

 

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A Finextra member
A Finextra member | 03 March, 2011, 14:55

I agree with Matt, and according to our NFC pilot experience I can add as follows: when the phone is acting like MC/VISA card (debit/credit/prepaid/preauthorized) nothing in the payment system - authorization/clearing/settlement has to be changed. Different is initialization (data prep/perso/activation) over the air (OTA) and new is the role of TSM. But this is not the problem. Anyhow, we are waiting for new phones a years.....It is like having an infrastructure e.g. rails but without trains. And as a banker I'm really afraid that the new technology is bringing us the new economy. Who will not catch the train in the right moment will loose the market. And the banks are traditionally conservative....

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Brett King
Brett King - Moven - New York | 03 March, 2011, 17:18

Matt,

Agree - a single standard would be a great place to start, which is where there is an obvious opportunity for Visa, Mastercard, Monetize, etc to get together and launch on the basis of such. Of course, everyone wants to 'own' the standard, instead of operating within a standard, which is the problem.

BK

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